Both sides stick around. Then the italians get the chance they are looking for! and surprise the CW. They force a surface combat - which turns out to be super bloody for both. Looks like the carrier combat has blunted the Italian battleship force enough to let the CW fight back on equal terms even here.
On the CW side, Coventry, Cumberland and Carlisle are all sunk, Curlew is damaged (guess I didn't like the letter C.

). On the Italian side, Giulio Cesare rolled badly and is sunk, and so are the cruisers Trento and Giussano.
The Italians now have a naval factor total lower than the Commonwealth, and no carriers. So the CW has a decisive advantage now, not even luck can help Mussolini out. The Italian fleet therefore aborts back to La Spezia.
That includes the convoys, so Italy is going to take a production hit now.
On the other hand the Allies foolishly sent an AMPH and a TRS without escort in the eastern med, trying to move units out under the nose of the Sparvieros. Bad idea, as the AMPH is sunk along with a MOT inside it by the Italians.